Case Blog

Two weeks ago I wrote that while I start every week with an optimistic outlook that the worst of the credit crunch is behind us, I soon find myself disappointed by the “other shoe dropping.” Unfortunately, my fears were confirmed on that Friday, March 14th, when we learned that the venerable Bear Stearns (BSC) was suffering from a classic run on the bank and that many of its traditional trading partners were refusing to trade with them. We also learned that the Federal Reserve, under Ben Bernanke, working with Treasury Secretary Hank Paulson had developed a 30-day rescue plan with the assistance of Jamie Dimon and his team at JPMorgan Chase (JPM). We awoke on Monday, March 17th to find out that the 30 days had lasted a weekend and that Bear Stearns, which had closed at $30 on Friday, was now being sold to JPMorgan Chase for $2 per share. In effect, they were declared bankrupt and a threat to the confidence that was needed to restore the markets’ equilibrium.

As much as I do not like government bailouts, I believe that given the severity of the credit crunch globally and the lack of confidence we have experienced since August, the Fed made the right decision to save The Bear. I would like to add at this point that I feel the pain of the Bear Stearns employees, who owned more than 30% of the firm and saw their holdings virtually wiped out. When you compound this with how many of them will lose their jobs in this merger, you can empathize with their plight.

Unfortunately, much of the anger has been directed at Jamie Dimon and JPMorgan Chase for stealing The Bear. I sense that this anger should have been directed at Bear Stearns’ Chairman Jimmy Cayne, who until this summer was their CEO and had been for more than a decade, and Alan Schwartz, the current CEO. While they did tap Jimmy Cayne’s old friend Joe Lewis for additional capital last fall, it was a minuscule amount compared to what their counterparts at Citigroup (C) and Merrill Lynch (MER) raised during the same time period because of the collapse of the subprime mortgage market. There was Bear Stearns, with two of their hedge funds collapsing and daily stories in the Wall Street Journal about Jimmy Cayne being out of the office at bridge tournaments or on the golf course, while we were reassured by Alan Schwartz that this highly leveraged enterprise had adequate capital. Clearly both Cayne and Schwartz did not understand that the leverage that works wonders on the upside can kill you on the downside. Jimmy Cayne may have been an extraordinary trader in his day, but those days were in the past. One needs to know when to exit. Brett Favre’s retirement after an outstanding NFL season and career was in stark contrast to Jimmy Cayne’s hanging on.

I wrote in a blog, Confidence, on November 8th of 2007:

“The lesson for those of us in the media business is very clear: companies need leaders that know their business and have come up through the ranks. Leaders need to rise from the operating side of the business and understand the markets’ need for transparency. Unfortunately, the trappings of power help many leaders forget that their board represents the shareholders and other stakeholders in the firm and that surprises and failure to deliver on promises can only be tolerated for so long. Sandy Weill’s legacy would have been much better served if JPMorgan Chase’s CEO, Jamie Dimon, Weill’s original heir apparent, had succeeded him, as opposed to his corporate counsel, Chuck Prince.”

There is no experience that can replace that which is gained on the operations side of a business. Jamie Dimon and his team have now moved to calm the waters and have appropriately raised their $2 per share offer to $10 to insure shareholder approval. While the effects of the subprime debacle will continue to be felt for the near term, I am more confident today that with The Bear’s demise we touched bottom and with solid leadership from the Fed, the Treasury and the large money center banks, we will start to emerge from this very cold winter.